Cost savings versus cost shifting

One of the key components of policy analysis is to figure out when something is a cost savings where there are a net reduction in expenditures from a wide scale perspective on a given activity to cost shifting where the total resources being used for an activity is the same but the contribution of different entities changes.  This distinction is important to remember when reading through Avik Roy’s healthcare reform as he primarily engages in massive cost shifting as he has identified as one of his primary objective functions the minimization of federal expenditure in order to minimize high income taxation.  That is what he values, and that is what his plan would achieve.  There were elements of cost savings (bundled payments, hospital consolidation trust busting) but those were secondary to his primary means of “saving” money.  I disagree with his value judgment

When you read any policy analysis or proposal that explicitly states that it is attempting to optimize on a single category of expenditure reduction (in Roy’s case federal) and there is an explicit statement of a five trillion dollar gap between current and proposed, ask whether there are actual cost savings involved, or massive cost shifting:

Over a 30-year period, we estimate that raising the eligibility  age for Medicare by four months per year  would reduce Medicare spending by $6.6 trillion, with an offsetting increase in exchange-based premium subsidies of $1.5 trillion, for a net spending reduction of $5.1 trillion.

In Roy’s case, it is massive cost shifting he is engaged in.  And that is fine, he values low taxes and no services in his moral policy universe.  Let us be explicit in what that means though. 

Sometimes cost shifting is a good policy as it can lead to a more efficient way of achieving a task.  For instance, my two year old likes to “help” Mommy and Daddy sweep.  We will give him the broom and allow him to clean the dining room.  Once he sees a shiny object or his sister, we’ll take the broom back and sweep the kitchen, the room that needed to be swept.  The cots shift of taking the broom out of his hands and into ours produces significant time and thus cost savings as we avert a temper tantrum, get a happy child, and a clean kitchen. 

However, there are seldom that many wins that are that easy. 

The proposal to increase the Medicare eligibility age by four months per year is a classic example of cost shifting.  We have good estimates from the CBO on the federal budgetary impact of raising eligibility age by two months a year to merely age 67.  The federal deficit impacts are minimal, as the savings on Medicare are eaten up by increased subsidies for the Exchanges, increased disability payments and increased Medicaid payments plus increased suffering as more people are uninsured:

Looking farther into the future, CBO estimates that by 2038, spending on Medicare would be about 3 percent less under this option than it would be under current law—4.7 percent of gross domestic product rather than 4.9 percent. On the basis of its estimates for 2016 through 2023, CBO projects that roughly two-thirds of those long-term savings from this option would be offset by the increases in federal spending for Medicaid and exchange subsidies and the reduction in revenues described above.

Although CBO anticipates that most people who would lose eligibility for Medicare under this option would continue their existing health insurance coverage or switch to other forms of coverage, the number of people without health insurance would increase slightly. For example, CBO estimates that of the 5.5 million people who would be affected by this option in 2023, about 50 percent would obtain insurance from their (or their spouse’s) employer or former employer, about 15 percent would continue to qualify for Medicare on the basis of their eligibility for disability benefits, about 15 percent would buy insurance through the exchanges or in the nongroup market, about 10 percent would receive coverage through Medicaid, and about 10 percent would become uninsured.

Roy reduces the offsets by decreasing Exchange subsidies by significantly reducing what the subsidy has to buy on the Exchange and shifting long term disablity care for Medicaid to the states.  In his world, the federal government would offload most of their expenditures to the group insurance market, or onto the backs of individuals who would go uninsured and thus have a much higher risk of having significantly lower quality of life or possibility of avertable death than they would if they were Medicare enrolled.  And since Medicare is cheaper than group health insurance, dumping people back onto the group health insurance market means that the people who receive group health insurance will be eaten up by the increased premiums of employed elderly and near elderly who are then hanging on for their dear lives for Medicare eligibility. (BTW, this is why Medicare buy-in to age 55 was attractive, it removed the oldest and most expensive current cohort from the group insurance market, significantly reducing rates and shifting risk onto the federal government)

And this is only with the two month jump to age 67.  Moving to age 75 in four month leaps cost shifts even more aggressively. The biggest difference would be the incentive effect to stay with employer sponsored coverage would be far stronger and far longer plus the very low acturial value of plans that insurance companies would offer to healthy seniors and the absolutely fugly plan designs that would be offered to potentially and actually sick seniors would shift most of the risk and costs of moving away from an effective single payer system to Roy’s Universal Exchange with its attendant low coverage schemas onto individuals. 

Sure, it saves the federal government a buck, and it might reduce health expenditures because a $7,000 or $10,000 deductible with a network that doesn’t have a tier 1 doc in the specialty that you need will reduce utilization through fear of bankruptcy and FUD on the customer service phone tree, but suffering is real and it is expensive. But it is not actually saving significant system resources except through increased suffering via foregone treatment or earlier death of poorer seniors who are no longer Medicare eligible, so again, the cost savings are cost shifts to demonetized costs.

24 replies
  1. 1
    Baud says:

    The common dogma of both conservatives and libertarians is that government benefits are an inherent evil. Therefore, cost shifting away from the government is more important to them than systemic cost savings.

    That is what he values, and that is what his plan would achieve. There were elements of cost savings (bundled payments, hospital consolidation trust busting) but those were secondary to his primary means of “saving” money. I disagree with his value judgment

    Does Roy admit that his value judgment is to reduce federal expenditures? Or does he instead assert that his plan actually produces better outcomes at lower costs? It’s a question that goes to his credibility.

  2. 2
    nanute says:

    Roy’s plan is just a continuation of conservative cost shifting to the states that started during the Reagan revolution. The cost impact to states is even greater when one considers the fact that states can’t deficit spend, and the federal government can.

  3. 3
    Marc says:

    Moving to age 75 in four month leaps cost shifts even more aggressively. The biggest difference would be the incentive effect to stay with employer sponsored coverage would be far stronger and far longer

    In other words, the boomers would never be able to retire and the kids would never be able to get a job.

  4. 4
    Baud says:

    Every time I read about one of these alternative health reform proposals from conservatives, it reminds me of what an achievement Obamacare really was. And Roy’s is probably a far saner proposal than what you’d see coming out of a GOP Congress.

  5. 5
    Richard Mayhew says:

    @Marc: Yep — or it would depress wages even more and concentrate power among capital to an even higher degree — feature and not a bug

    @Baud: Yep

  6. 6
    kindness says:

    Yea but to the low tax zero services crowd the poor dying earlier is a feature, not a bug. It decreases their taxes and that is more important than living citizens.

  7. 7
    revrick says:

    In other words, Roy’s plan is the real death panel.

  8. 8
    hoodie says:

    The common dogma of both conservatives and libertarians is that government benefits are an inherent evil. Therefore, cost shifting away from the government is more important to them than systemic cost savings.

    More accurately, cash up front is more important than public goods that they won’t immediately and directly benefit from. Conservatives view society as a balance sheet. They’re all for big government when the cash is going to their pockets. They get an immediate and direct benefit from not paying taxes for things like universal healthcare, while they might have to share the benefits of systematic cost savings in healthcare. The benefits from social programs might not materialize because of factors they cannot control or will materialize after they’re gone (yeah, fuck the kids), and they won’t get a disproportionate share because these social benefits are loaded with the shared overhead. In other words, the modern conservative ethos is skimming. Avik Roy is not much different than a Vegas mobster, except the latter is probably more honest about what he’s doing.

  9. 9
    Lee says:

    Typo at the start: ‘fucntions’

  10. 10
    Mike in NC says:

    Raising the age for Medicare eligibility to 75 is Step 1. Abolishing the entire system is Step 2.

  11. 11
    Scamp Dog says:

    How does “n months per year” get implemented? I can think of three ways:

    1) every 12/n years, the eligibility age goes up a full year

    2) add n times number of years to your birth month to check eligibility

    3) add 30n times number of years to your birthday to check eligibility, rounding up somehow at appropriate intervals.

    I suppose (1) is a bad idea from Roy’s point of view since it delays the onset of benefit reduction and denial, while (2) and (3) are confusing to anyone besides beaurocrats trained in the rules.

    Has this sort of increase actually ever been done in the real world, or is this entirely theoretical?

  12. 12
    RSA says:

    Thanks for reading through the proposal and clarifying some of the issues, Richard. They’re too hard for me to tease out.

    I’ve had a little bit of experience with cost shifting at work. When I started, years ago, my department had someone responsible for making travel arrangements. I’d give her some constraints and preferences, and she’d handle the rest. Her position was eliminated, saving the organization money, but I found that for some complicated trips it took me a long time to figure out, and I was never sure whether I had the best deal, or even a good deal. So I started using an external travel agent. From my organization’s standpoint, the shift was a win, because of lower cost on the books. But the unmeasured cost in my (much more expensive) time and my personal outlay for services didn’t enter into their calculations. I see some basic similarities.

  13. 13
    rikyrah says:

    Roy is a clown that too many people have him on their shows and pretend that he is some “thinking” Republican. He had no problem with the healthcare system that we had pre-Obamacare.

  14. 14
    D58826 says:

    A long round about way of saying the conservative health plan is ‘when you get sick die quickly’. Since these people claim to be devoted Christians I’d hate to see what they would come up with if they were atheist – maybe just shoot every one who sneezes?

  15. 15
    dick mayhew says:

    @Scamp Dog:

    Let us pretend that an individual is born on January 1.

    If they are born on or before 1/1/1951, they are eligible when they turn 65 on 1/1/16
    If they are born in 1951, they are eligible on May 1, 2016
    If they are born in 1952, they are eligible on September 1, 2017


  16. 16
    Scamp Dog says:

    @dick mayhew: So it’s one of the confusing options. Anyway, thanks for the info!

  17. 17
    Richard Mayhew says:

    @Scamp Dog: Yeah, this has been done in the realworld. It is effectively how Social Security Full Retirement Age (aka normal benefit age) has been slowly moving from 65 to 67.

  18. 18
    Joe F says:

    There is likely one powerful special interest group that would stridently oppose this effort: Insurance companies. The actuarial on covering people above the age of 65 shows that this group of individuals massively increase costs (at the expense of profits) for private insurance companies. Moving these individuals out their risk pool substantially increases profits. Insurance companies have always quietly supported Medicare because it removes people from their rolls just about the time that they generally start consuming health care much more, so they cash the profits on premiums before people’s need for health care before they increase by order of magnitude. They would actually prefer that the age requirement go down and they only play as supplementary coverage

  19. 19
    japa21 says:

    Cost shifting, yes. Limited savings to the government, yes. Less overall expenditures, questionable.

    Yes, there would be more uninsured but for those who are insured, expenditures would increase as private insurance rarely pays at the Medicare level. Rather it pays at Medicare plus a percent, frequently a high extra percentage.

    Unmnetioned in all of this is the impact on workers’ compensation. it is pretty much a given that the ACA will actually reduce the amount WC pays out for medical care, as frequently treatment must also be given for a comorbidity which impacts recovery from an actual injury. This treatment would now be covered by regular health insurance and WC focuses solely on the actual injury. Ot, the comobidity has alreayd been treated and does not influence the injury treatment.

    Going this route would throw the cost back on WC, which would impact WC insurance rates, which impacts pay, etc. etc.

  20. 20
    D58826 says:

    It is the same conservative shell game that they use for ever safety net program. Shift the program to the states in a block grant. Watch the states impose all manners of restrictions that prevent most people from enrolling. And wala they have effectively repealed the program without actually being held responsible for repeal. IT is the old every man for himself and devil take the hind most/survival of the richest approach

  21. 21
    StringOnAStick says:

    So the rethugs went from having no plan to replace Obamacare with, to coming up with this little gem that has lots of smoke and mirrors, and in the process screws even MORE people than the pre-ACA system did. Bravo, I guess. Surprised, I am not. And the people it would screw the most are those that are no longer able to work for The Man/Machine, and are thus no longer useful to the corporate overlords. Look out, this one’s going to get some traction.

  22. 22
    Villago Delenda Est says:

    The problem with the cost savings vs. cost shifting meme is that those who tout “savings” while actually “shifting” are basically saying that the providers must have their profits made at the expense of the suffering under all circumstances, we’ll just shove those costs onto the less morally deserving, that is, those who don’t have in the first place.

  23. 23
    jl says:

    There is some econometric literature claiming that the CBO and Roy is wrong. Instead, increasing eligibility age will increase Medicare expenditures if current standards of care are maintained. Problem comes from the private sectors policy of ‘patch ’em up and keep ’em alive until we can shove the problem off to Medicare’ attitude, which I have heard stated explicitly by medical directors and financial analysis of some major insurance providers in CA fr the ‘pre-elderly’ with chronic conditions. Also, there is evidence that churn in coverage, and disruptions in having a continuous ‘medical home’ (that is regular doc or NP who knows you well) increases costs for older adults with chronic conditions.

    Don’t have the references at hand, but if RM is interested can look for them somewhere down in my computer, or do a search.

  24. 24
    Brett says:

    It’s amazing that conservatives can keep on churning out policy proposals where the primary focus is “cost”, when nearly all of the health-care-related legislation of the past few decades has centered around coverage. Turns out what most Americans care about most when it comes to health care is making sure that we have it, and that shows up in the legislation that gets passed.

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